Partisan conflict, political insurance, and firm bankruptcy risk

This paper explores the link between partisan conflict, political connections and corporate bankruptcy risk. Based on a sample of US non-financial firms, empirical results show that high partisan conflict significantly raises corporate propensity to be bankrupt. This effect is robust to using alternative definitions of bankruptcy, controlling for policy uncertainties, excluding election years and the global financial crisis and addressing endogeneity through instrumental variable analysis. The outcome is more pronounced for small and medium firms and is valid for firms operating in industries with high cash flow volatility. Firms strengthening their political connections can reduce such risks through increased capital investments, operating cash flows and profitability. The political insurance is effective during periods of very high partisan conflicts, endures in the long run and remains robust in matched samples constructed via propensity score matching.